[I]n recent decades central banks have become even more significant as a
consequence of the development of financial markets. Even when not formally
designated as such, central banks have become the guardians of financial-market
sanity. The dangers of failing at this task have been made painfully clear in
the sub-prime mortgage debacle. ...

This is a job at which former Fed Chairman Alan Greenspan proved to be a
spectacular failure. ... As a member of the Fed’s Board of Governors under
Greenspan..., Bernanke can also be faulted...

What hampered Greenspan and Bernanke as financial regulators was that they were
excessively in awe of Wall Street... They operated under the assumption that
what is good for Wall Street is good for Main Street. This will no doubt change
as a result of the crisis, even if Bernanke remains at the helm. But what the
world needs is a Fed chairman who is instinctively skeptical of financial
markets and their social value.

Here are some of the lies that the finance industry tells itself and others, and
which any new Fed chairman will need to resist.

Prices set by financial markets are the right ones for allocating capital and
other resources to their most productive uses. That is what textbooks and
financiers tell you, but ... there are far too many “market failures” in finance
for these prices to be a good guide for resource allocation. ... Implicit or
explicit bailout guarantees, moreover, induce too much risk-taking. ... So the
prices that financial markets generate are as likely to send the wrong signals
as they are to send the right ones.

Financial markets discipline governments. This is one of the most
commonly stated benefits of financial markets, yet the claim is patently false.
... If in doubt, ask scores of emerging-market governments that had no
difficulty borrowing in international markets, typically in the run-up to an
eventual payments crisis.

In many of these cases ... financial markets enabled irresponsible governments
to embark on unsustainable borrowing sprees. When “market discipline” comes, it
is usually too late, too severe, and applied indiscriminately.

The spread of financial markets is an unmitigated good. Well, no.
Financial globalisation was supposed to have enabled poor, undercapitalised
countries to gain access to the savings of rich countries. It was supposed to
have promoted risk-sharing globally. In fact, neither expectation was fulfilled.
...

Financial innovation is a great engine of productivity growth and economic
well-being. Again, no. Imagine that we had asked five years ago for examples
of really useful kinds of financial innovation. We would have heard about a long
list of mortgage-related instruments... The truth lies closer to Paul Volcker’s
view that for most people the automated teller machine (ATM) has brought bigger
benefits than any financially-engineered bond.

The world economy has been run for too long by finance enthusiasts. It is time
that finance skeptics began to take over.

[I]n recent decades central banks have become even more significant as a
consequence of the development of financial markets. Even when not formally
designated as such, central banks have become the guardians of financial-market
sanity. The dangers of failing at this task have been made painfully clear in
the sub-prime mortgage debacle. ...

This is a job at which former Fed Chairman Alan Greenspan proved to be a
spectacular failure. ... As a member of the Fed’s Board of Governors under
Greenspan..., Bernanke can also be faulted...

What hampered Greenspan and Bernanke as financial regulators was that they were
excessively in awe of Wall Street... They operated under the assumption that
what is good for Wall Street is good for Main Street. This will no doubt change
as a result of the crisis, even if Bernanke remains at the helm. But what the
world needs is a Fed chairman who is instinctively skeptical of financial
markets and their social value.

Here are some of the lies that the finance industry tells itself and others, and
which any new Fed chairman will need to resist.

Prices set by financial markets are the right ones for allocating capital and
other resources to their most productive uses. That is what textbooks and
financiers tell you, but ... there are far too many “market failures” in finance
for these prices to be a good guide for resource allocation. ... Implicit or
explicit bailout guarantees, moreover, induce too much risk-taking. ... So the
prices that financial markets generate are as likely to send the wrong signals
as they are to send the right ones.

Financial markets discipline governments. This is one of the most
commonly stated benefits of financial markets, yet the claim is patently false.
... If in doubt, ask scores of emerging-market governments that had no
difficulty borrowing in international markets, typically in the run-up to an
eventual payments crisis.

In many of these cases ... financial markets enabled irresponsible governments
to embark on unsustainable borrowing sprees. When “market discipline” comes, it
is usually too late, too severe, and applied indiscriminately.

The spread of financial markets is an unmitigated good. Well, no.
Financial globalisation was supposed to have enabled poor, undercapitalised
countries to gain access to the savings of rich countries. It was supposed to
have promoted risk-sharing globally. In fact, neither expectation was fulfilled.
...

Financial innovation is a great engine of productivity growth and economic
well-being. Again, no. Imagine that we had asked five years ago for examples
of really useful kinds of financial innovation. We would have heard about a long
list of mortgage-related instruments... The truth lies closer to Paul Volcker’s
view that for most people the automated teller machine (ATM) has brought bigger
benefits than any financially-engineered bond.

The world economy has been run for too long by finance enthusiasts. It is time
that finance skeptics began to take over.